UNCLASSIFIED

5058/13

COM(2012) 769

EXPLANATORY MEMORANDUM ON EUROPEAN UNION DOCUMENT

Report from the Commission to the European Parliament and the Council on the application of Directive 2006/48/EC to microcredit

Submitted by HM Treasury January 2013

SUBJECT MATTER

MICROCREDIT

  1. During Capital Requirements Directive 2 (CRD 2) negotiations, EU legislators asked the Commission to review the effect of the Capital Requirements Directive (CRD) on microcredit.[1]This report is the outcome of that review. It describes the variation in microcredit providers across the EU and it explains how CRD has affected them. It concludes that CRD is not a significant impediment to microcredit and suggests that any regulatory change would have to be very carefully considered if it was needed at all.
  1. Microcredit is defined as the provision of small loans, normally to people or businesses who struggle to access more conventional sources of credit. Such loans are normally small, short term and unsecured, requiring frequent repayments and charging high interest rates. Microfinance is broader than just microcredit, including savings products, payment services and current accounts for instance.
  1. Microcredit providers vary greatly and come in a variety of legal forms. One key distinction is between bank and non-bank microlenders. Non-banks are the main providers of microcredit but banks play an important role, as does the public sector which often supplies funding for microfinance. Importantly, save for a few exceptions, EU banking legislation prevents non-bank microlenders from receivingdeposits.
  1. A large proportion of microcredit providers, the non-bank microlenders, are not subject to the requirements of the CRD legislation. This is because they do not fall within the definition of “credit institution” for the purposes of that legislation.
  1. In relation to bank microlenders (i.e. those which are subject to the requirements of the CRD), as the forms and practices of microcredit providers vary widely in the EU and the CRD does not account for this variation, it impacts them somewhat unevenly.

IMPACT OF CRD ON BANK MICROCREDIT

  1. In principle, bank microcredit loans are subject to a high risk weight but the majority of Member States operate credit guarantee schemes which significantly reduce the risk borne by microlenders (typically securing 60-80% of the loan).Microcredits are also exempt from the large exposure limit in CRD, which is designed to limit concentration risk, because of their small size. In this sense, the impact of CRD on microcredit is significantly lessened.
  1. CRD requires bank microlenders to carry out comprehensive risk management processes which not only mitigates their risk but also improves their credibility and that of the microcredit sector as a whole. In this respect, CRD benefits bank microlenders. However, CRD can also increase the administrative bank burden on microlenders.

COMMISSION CONCLUSIONS

  1. The Commission does not consider that prudential requirements set out in the CRD impede the development of microcredit. Consequently, the Commission does not recommend any substantive changes to CRD.
  1. The Commission suggest that the availability of microcredit is largely driven by non-prudential factors and that there may be no need to review regulation. They state that if any changes were to be adopted, they would have to carefully account for the variation amongst microlenders in the EU.
  1. The Commission recognised the need to promote microcredit and hasbeen active in this area – notably the European Progress Microfinance Facility was launched in 2010 to increase the availability of microcredit for alleviating unemployment amongst young people and to help them develop businesses.
  1. The Commission suggests that wider provision of loan guarantees and encouraging financial transparency may create a better atmosphere for microcredit, as could the development of voluntary codes of conduct.

SCRUTINY HISTORY

  1. There has been no previous Parliamentary scrutiny concerning CRD and microcredit.

MINISTERIAL RESPONSIBILITY

  1. The Chancellor of the Exchequer has responsibilityfor the United Kingdom policy on European Union monetary and economic issues. The Foreign and Commonwealth Secretary is responsible for overall United Kingdom policy towards the European Union.

INTEREST OF THE DEVOLVED ADMINISTRATIONS

  1. The regulation of financial services is a reserved matter under the UK’s devolution settlements. The devolved administrations have therefore not been consulted in the preparation of this EM.

LEGAL AND PROCEDURAL ISSUES

  1. Legal basis
  1. Not applicable: the report does not include any proposals for legislation.
  1. European Parliament Procedure
  1. Not applicable: the report does not include any proposals for legislation.
  1. Voting procedure
  1. Not applicable: the report does not include any proposals for legislation.
  1. Impact on United Kingdom Law
  1. None.
  1. Application to Gibraltar
  1. None.

vi.Fundamental rights analysis

  1. No fundamental rights issues arise from this proposal.

APPLICATION TO THE EUROPEAN ECONOMIC AREA

  1. None.

SUBSIDIARITY

  1. Not applicable: the report does not include any proposals for legislation.

POLICY IMPLICATIONS

  1. The report makes no specific recommendations and is not due to be discussed. Consequently, there are no clear policy implications for the UK. However, the UK already has a number of initiatives in place which reflect the Commission’s suggestions for encouraging microcredit provision.
  1. The Bank of England and HM Treasury announced the launch of the Funding for Lending Scheme (FLS) on 13 July 2012 to support lending to households and non-financial businesses. The FLS opened to banks and building societies on 1 August for the next eighteen months.
  2. The FLS is designed to provide strong incentives to banks to boost their lending to households and non-financial businesses. It reduces the funding costs of banks and building societies so that they can make loans cheaper and more easily available. Banks that increase lending to UK households and businesses can borrow more in the FLS and at a lower cost.
  3. The Enterprise Finance Guarantee was launched in January 2009 (replacing the Small Firms Loan Guarantee) and enables lenders to provide debt finance to small businesses which can demonstrate that they have capacity to repay a loan in full, but do not have sufficient security.
  4. EFG supported over £200m of lending in 2012 and has the capacity is due to provide over £2 billion in total over 4 years.
  5. EFG will be extended to trade credit in early 2013 through a pilot with Kingfisher enabling SMEs to obtain additional finance through Kingfisher’s in-house credit service.
  1. HM Treasury recognises the need to consider the impact of CRD and other financial regulation on microfinance and will continue to monitor ongoing work in this area.

CONSULTATION

  1. None.

IMPACT ASSESSMENT

  1. Not applicable: the report does not include any proposals for legislation.

FINANCIAL IMPLICATIONS

  1. There are no financial implications for the UK arising from the Commission report.

TIMETABLE

  1. Not due to be discussed.

Greg Clark

Financial Secretary

HM Treasury

UNCLASSIFIED

[1] CRD is Directive 2006/48/EC and 2006/49/EC; CRD 2 is Directive 2009/111/EC; CRD 3 is Directive 2010/76/EU; CRD 4 is currently in Trilogues.